A 9-month short position of a forward contract on a stock is entered into today, when the stock price is $60. The stock has expected dividends of $1.0 in 2 months, $2.0 in 5 months, and $2.0 in 7 months respectively. The risk-free interest rate is 3.0% per annum with continuous compounding.

(a) What is the forward price today? (5 marks) (b) What is the initial value of the forward contract today? (5 marks)

(c) 3 months later, the price of the stock decreases to $55 and the risk-free interest rate remains the same. What are the forward price and the value of the forward position then? (10 marks)

Question 3 (20 marks)

A 9-month short position of a forward contract on a stock is entered into today, when the stock price is $60. The stock has expected dividends of $1.0 in 2 months, $2.0 in 5 months, and $2.0 in 7 months respectively. The risk-free interest rate is 3.0% per annum with continuous compounding.

(a) What is the forward price today? (5 marks)

(b) What is the initial value of the forward contract today? (5 marks)

(c) 3 months later, the price of the stock decreases to $55 and the risk-free interest rate remains the same. What are the forward price and the value of the forward position then? (10 marks)

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